New scrutiny for political cash

Published 6:15 am, Friday, May 13, 2011

The huge - and untaxed - cash moving from big donors like George Soros and the Koch brothers to nonprofit political advocacy groups are coming under scrutiny by the Internal Revenue Service.

Five high-dollar donors have been notified by the IRS that they are under investigation because they had not filed gift tax returns - required for large political donations - on their contributions to 501(c)4 groups and could owe taxes for exceeding nontaxable limits.

The agency would not reveal the names of the donors or the groups that they gave to, but the investigations suggest that the IRS will keep a closer eye on 501(c)4's than in the past. Unlike 501(c)3 groups, 501(c)4's can support candidates and legislation, though they cannot be primarily political. In recent years, though, many 501(c)4 groups have been stepping up their political involvement, drawing criticism from people who say this goes against the intended function of the tax exemption they are granted.

The IRS's investigations are not political, according to IRS spokeswoman Michelle Eldridge. "These examinations were started by employees of the Estate and Gift Tax Unit at the IRS as part of their increased efforts in the area of non-filing of gift and estate tax returns," she said.

Individual donors can give up to $13,000 annually before incurring gift taxes of 35 percent, but major donors like Soros and the Kochs are known to give much more than that in recent election cycles. There is also a lifetime exemption of $5 million, but many wealthy Americans reach that level in their estate plans alone.

The IRS also rebuffed the idea that any outside pressure prompted the new scrutiny.

"These examinations are not part of a broader effort looking at donations to 501(c)4s," Eldridge said. "All of the decisions involving these cases were made by career civil servants without any influence from anyone outside the IRS."

Nonetheless, the IRS is shifting its focus from being almost exclusively on monitoring 501(c)3s. The agency's 2011 annual report and workplan, released just after the end of the 2010 election cycle, outlines an "increasing . focus" on 501(c)(4), (5) and (6) groups.

"We will look at issues including political activity, inurement and the extent of compliance with the requirements for tax exemption by organizations that self-identified themselves as a section 501(c)(4), (5) or (6) organization," the plan says.

As the IRS is homing in on 501(c)4's, the next frontier of campaign finance is already being explored: super PACs, which can accept and spend unlimited amounts of money so long as they do not collaborate with candidates or political parties.